Buying into food producers has always been one of those classic safe-haven investment plays for troubled geopolitical and economic times. With the UK readying to exit the European Union on 31 January and entering the next stage of the Brexit process – tough and potentially prolonged trade discussions – the likes of Tesco (LSE: TSCO) might seem like a wise flight-to-safety stock to buy today.
This is not an opinion that I myself hold. I’ve often talked of the disruptive effect that new entrants, like Aldi and Lidl on terra firma and Amazon in cyberspace, are having on the profit columns of established operators like Tesco. But there’s also evidence that Brexit uncertainty is causing havoc for grocery retailers like the rest of the high street, too.
Office for National Statistics data backs this up perfectly. Food store sales dropped 1.3% (by quantity) in December, the worst result since December 2016. But of course Tesco isn’t just a seller of edible goods, and news of a corresponding 2% fall in clothing sales across the UK last month is an added worry.
So never mind the City’s upbeat growth forecasts, I say. Current forecasts suggest earnings rises of 23% and 8% at Tesco in the fiscal years to February 2020 and 2021 respectively. I reckon profits are very likely to disappoint, and so despite its reasonable forward price-to-earnings ratio of 14.6 times, I’m not tempted to buy the supermarket for even a second. I’d sell it today.
A better buy
Tharisa (LSE: THS) is a growth share that also hasn’t had it all its own way of late. City analysts expect earnings to swell 298% in the financial year to September 2020. But thanks to recent production problems – ones that caused its platinum group metal (PGM) output to fall 8.2% in fiscal 2019 – there hasn’t been a slew of buyers piling in following the autumn sell-off.
I think that Tharisa is worthy of serious attention right now, however. Its forward price-to-earnings ratio of 6.7 times sits comfortably below the bargain-basement benchmark of 10 times. And with PGM prices tipped to keep surging – partly on expectations of more safe-haven buying related to geopolitical issues like Brexit – this is a reading that provides plenty of upside.
Is production about to rise?
But what about those production problems, you might ask? Well power problems and poor weather impacted group output in the December quarter, though the mining of some 1.14m reef tonnes (up 4.8% year on year) was still quite robust under the circumstances. Investment in mining companies is risky business for this very reason. But should mining activity at Tharisa improve towards the second half of the year, as it expects, then the South Africa-focused firm could really take off.
One final thing: Tharisa offers up a chunky 2.5% dividend yield for fiscal 2020 at current prices. It might not be the biggest payer out there but this inflation-beating reading offers an added sweetener for share pickers.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.